The International Monetary Fund (IMF) has reported that a further decrease in inflation is expected in Turkey. According to the IMF statement, the 4th article consultation with Turkey was completed on September 27, highlighting that the determined changes in economic policies have strengthened Turkey’s overall policy stance. The statement pointed out that tax and expenditure measures supported efforts to restore fiscal prudence and emphasized that commitment to stronger income policies enhanced credibility. It was stated that the policy shift reduced economic imbalances and restored confidence. The statement mentioned that headline inflation decreased due to tightening financial conditions putting pressure on domestic demand, and that market sensitivity sharply improved as both domestic and foreign investors turned to assets denominated in Turkish Lira, supported by low commodity prices, vibrant exports, and declining gold imports, contributing to significant improvements in both gross and net reserve positions and strengthening the current account.

The statement used the phrase “Authorities are expected to further decrease inflation within the framework of gradual policy adjustments.” It was mentioned in the statement that the risks related to expectations are significant and downside risks include stronger than expected wage and price inertia, reversal of capital flows, rising global energy prices, and increasing geopolitical tensions. The statement noted that significant financial and external vulnerabilities persist and emphasized that the gradual approach to combating inflation extends the time during which risks may emerge. Proposal for Fiscal Consolidation

The statement, which also includes assessments of the IMF Executive Board, appreciated Turkish authorities for their steadfast policy tightening since mid-2023 that significantly reduced macroeconomic imbalances and risks. It called for the implementation of coordinated fiscal, monetary, and income policies to anchor inflation expectations and ensure macroeconomic stability. Pointing to sustainable levels of public debt, it recommended larger and more front-loaded fiscal consolidation to support efforts to combat inflation and further strengthen buffers. It was suggested that transitioning to wage-setting in line with inflation expectations could significantly reduce inflation and urged the continuation of a tight, data-dependent monetary policy until inflation approaches target levels. It was emphasized that the Central Bank should be prepared for further tightening if necessary to ensure the path towards reducing inflation. The importance of vigilance and further reforms to maintain financial stability was also stressed in the statement, appreciating Turkey’s removal from the Financial Action Task Force gray list. The statement called for advancing structural reforms to achieve more inclusive, greener, and higher medium-term growth.

Expectations on Inflation

The statement also included economic forecasts, indicating that the Turkish economy is expected to grow by 3% in 2024, 2.7% in 2025, 3.2% in 2026, 3.4% in 2027, 3.7% in 2028, and 3.9% in 2029. It was expressed that the unemployment rate is expected to gradually decline after a slight increase next year, with 9.3% this year, 9.9% in 2025, and decreasing in the following years to reach 9.2% in 2029. The statement mentioned that the end-of-year inflation expectation for this year is 43%, 24% in 2025, 17.2% in 2026, 15.3% in 2027, and 15% in 2028 and 2029, while it was forecasted that the current account deficit to gross domestic product ratio would be 2.2% this year and would decrease to 1.9% in 2029.